MANY business owners and their staffers may know all about taking a car allowance instead of a company car.
What a lot of employers don’t know is that there is a simple way to save money by optimising the cash allowance for increased tax efficiency.
Let’s start with the basics…
What is a car allowance?
In simple terms, the employer pays the employee a monthly cash sum as an alternative to going the company car route. The employee is then responsible for running a suitable car and will no longer be liable for company car tax.
The employee can also claim MAR (mileage allowance relief) at the end of the tax year for the difference between the car allowance cash sum and the business fuel payments. At the moment, the rates are 45 pence per mile for the first 10,000 miles and 25p thereafter (the same as AMAPs – Approved Mileage Allowance Payments).
Making a cash for car allowance more efficient…
Optimising the cash allowance for maximum tax efficiency involves adjusting the payment structure so that the employee’s payment is made up of all AMAPs (Approved Mileage Allowance Payments) that are available after the deduction of their business fuel / mileage payments plus a cash payment top-up.
Of course, this amount can vary and it is entirely dependent on how many business miles have been travelled. Usually it would also include a payment equivalent to the mileage allowance relief that the employee would have received if all of their AMAPS were not used.
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So how much do I save?
Here’s an example of how optimisation can work for you:
- 20% Taxpayer
- Driving 10,000 business miles per annum
- Receives £4500 gross allowance plus 12 pence per mile
- Total Net Employee Income £4920*
Cost to the business – standard car allowance scheme
- Allowance Payments = £4500
- Class 1 NICs (13.8%) = £621
- Business Mileage Payments = £1200
- Total Cost to the Business = £6321
Cost to the business – Optimised Cash for Car Allowance Scheme
Although any optimised cash allowance needs to include an equivalent monthly payment to cover the tax relief the employee could obtain through MAR, your business could pay this allowance with tax and NIC-free AMAPs and top up with cash; by doing this, the actual cost to the business is much less.
- Total cost to the business = £5202.88
- Annual saving = £1118.12
Cash for car in summary…
Obviously, all savings are dependent on how many business miles the employee drives but even if it is only 2000 per annum, your business could save £223.62 per year by rolling out an Optimised Cash Allowance Scheme.
Of course, it will still be necessary to ensure that all business mileage records are kept accurately and any scheme should be checked for compliance before putting it into place.
Premier Blue are experts in this field and have helped many businesses make substantial savings by putting an Optimised Cash Allowance Scheme in place. Director of Premier Blue, Jim Salkeld, explains:
“Our clients are always surprised at how little effort – and cost – is actually involved in setting up their Optimised Cash Allowance Scheme scheme properly, especially given the annual savings that they make by doing so.
“I would always advise any business offering employees a cash allowance alongside company cars that it essential to operate an Optimised Cash Allowance Scheme.”
* After deduction of tax and NICs and assuming that the MAR was reclaimed, not taking into account any company car tax that is no longer paid.
Editor’ correction: When we first published this article on 29 October there was a typo on the Employee package which stated the employee’s gross allowance was £4920. The correct figure should have been £4500. The amount was corrected on 31 October. We apologise for any confusion that may have arisen. Ralph Morton, editor